How this startup went from 'pretty entertainingly terrible' to challenging Amazon head-on

Amazon Web Services is an unstoppable juggernaut in the cloud
services world, contributing a projected
$7 billion to the retail giant's revenues this year
alone.

A big part of that dominance is thanks to Amazon S3, a
super-popular cloud storage option that's most easily described
as like Dropbox for programmers to store all the data they need
for web and mobile apps.

All of the images on Tumblr, for instance, are hosted with Amazon
S3.

The killer feature of Amazon S3 is price. Because Amazon Web
Services operates at such massive scales and tremendous levels of
efficiency, it's able to offer storage at an ever-shrinking cost
to customers. Right now, Amazon S3 pricing starts at
three cents per
gigabyte stored.

But there's a new player in the market: Backblaze, a profitable, popular
startup that lets users back up as much data as they want to the
cloud for $5 a month or $50 a year.

Now, Backblaze is taking its eight years of experience with
helping users back their computers up to the cloud and using it
for "B2 Cloud Storage," a new service that charges a measley
$0.005 per gigabyte stored — as much as six times
cheaper than Amazon S3.

For price-conscious developers, that potential savings could make
all the difference in the world.

And the really ironic part? If Amazon S3 had been cheaper eight
years ago, Backblaze would never have developed the expertise it
needed to compete in the first place.

No money, no choices

Backblaze

Backblaze's founders met at an email security startup called
MailFrontier, which was then snapped up by SonicWall in 2006,
says CEO and co-founder Gleb Budman.

In 2007, one of the future Backblaze founders, still at
SonicWall, was doing tech support for a relative who had
accidentally and permanently deleted an important file. That
engineer was shocked to find that the relative had
absolutely no backups in place.

This led to a moment of inspiration, and Budman and other
one-time MailFrontier executives were gathered to build a
simple, straightforward way for people to back their stuff up to
an online service for a predictbale, $5/month price. In 2007,
Backblaze was officially formed.

In order to stay disciplined on building the product, Budman
says, Backblaze's founders decided not to raise venture capital,
instead relying on the team's pooled savings to get the business
off the ground. The thought was that taking venture cash would
force Backblaze to focus on pleasing investors rather than
building a sustainable business.

The current model of the
Backblaze storage pod.Backblaze

"At the most basic level, it makes people believe that money
comes from VCs," and not from actually making sales, says Budman.

In fact, they made the mutual arrangement to go without a salary
for the first year of Backblaze's existence — an arrangement
that would actually extend to five years total.

Which was great, but it meant that Backblaze was starting from a
disadvantage.

The original plan was to use Amazon S3 on the backend to build
Backblaze as a simple storage system that would let them host
their customer's data.

There was just one problem: The pricetag. Amazon S3 was, and is,
very cost-efficient for developers hosting a relatively modest
amout of data.

For Backblaze, though, which planned on storing its customers'
entire hard drives in the cloud, Amazon S3's price was too high.
Backblaze would either have to charge its customers an
unrealistically high pricetag, or else take a loss on their
$5/month pricing goal. Either way, Amazon S3 just wouldn't work
for them.

"Because we didn't have any money, we didn't have many choices,"
Budman says.

"Really entertainingly terrible"

So Amazon S3's pricing model was too expensive, and Backblaze
didn't really have the cash to buy commercial hardware from the
likes of Dell or HP.

This meant that Backblaze had to get creative. In this case,
creativity manifested itself as an ambitious plan to build its
own high-capacity, low-cost storage servers, called
"StoragePods."

Backblaze hit upon a method for taking sixteen hard drives,
stripped out of consumer-grade external hard drives by hand, and
attaching them to a motherboard to make a simple server.

Those servers, with hard drives in tow, would then get placed
into a custom server housing that they actually made out of wood.
Those handcrafted, artisinal wood-carved servers would then
get driven out to a data center where they rented some space and
installed.

One of Backblaze's first
wooden servers.Budman

A wooden server isn't exactly industry standard, but it was
enough to get Backblaze its first few customers. And, most
importantly for the young company, these StoragePods were
extremely cheap to manufacture.

Eventually, the StoragePod design evolved: It got a steeel
casing, and they were able to cram in 25 drives with around 5
petabytes of storage each. And thanks to developing relationships
with the suppliers of the casings and hard drives, costs stayed
low compared to the revenue that the storage business was
starting to bring in.

In the early days, of the company, Backblaze would actually have
monthly StoragePod assembly parties, Budman says. They would go
to their VP of Engineering's one-bedroom apartment in San
Francisco and just slap hard drives into cases all night
long.

That was bad enough, but they'd also have to go through the
tedious process of "burning in" those hard drives, Budman says,
which involves running them constantly for a week straight to
ensure they're more reliable when they're in the data center.

This meant that at any given time, there was always a server or
two sitting on the TV stand, humming away day and night and
heating the place up. Eventually, Backblaze shelled out for a
shed in the backyard for burning-in purposes.

Those early days were "pretty entertainingly terrible," Budman
says.

But that work in cost reduction didn't go unnoticed: When
Backblaze released the blueprints for the StoragePod as a free
download in 2009, over a million people took a look, which blew
Budman away.

Competition with Amazon

Backblaze's Silicon Valley
HQ.Backblaze

The StoragePod has let BackBlaze ride to success.

The company is profitable, and was able to hold off on
taking its $5 million Series A round of funding until 2012, which
was its fifth year of operation. Even then, Budman says, the
funding was to fund growth, not a move of desperation.

Today, Backblaze operates its own data centers, and stores over
150 petabytes of customer data. It's that focus on saving
cash at all costs that gives Backblaze its competitive edge now,
Budman says.

"Because we did that from the get-go, we have this storage that's
incredibly cost-efficient," says Budman.

In other words, Amazon may have an obscenely huge reach, with
gigantic data centers that means it can offer cloud storage at
razor-thin margins, locking itself into the so-called "race to
zero" with competitors like Google and Amazon.

But Backblaze does nothing but think about how to get the most
bang for their buck, and squeeze as much storage capacity as it
can out of its continually-evolving StoragePod design, Budman
says. The newest Storage Pod, version 4.5, boasts 180 terabytes
of capacity, and Backblaze still needs to put in 20 to 30 new
ones per month (but no longer in anybody's apartment,
thankfully).

Which means that B2 Cloud Storage can offer even lower prices,
and still make the company a healthy amount of money on volume.

And if Amazon S3 had just taken this stance when it started,
Budman says, it would never be facing the threat of B2 Cloud
Storage.

"The reality of it is, if this had existed at the time, we
wouldn't have had to build our own," Budman says.

Disclosure: Jeff Bezos is an investor in Business Insider through his
personal investment company Bezos Expeditions.